Five Leasing Nightmares a Lawyer Can Help Prevent

Thursday

Mar 1, 2012 at 12:01 AMJun 11, 2013 at 7:05 AM

In the days of the Internet and do-it-yourself legal advice, some services that used to always involve an attorney no longer do. There’s a growing portion of the population that thinks nothing of buying a house, drafting a will—even getting divorced—without seeking professional counsel. That trend has carried into the commercial real estate and leasing arena as well.

Take the case of Frank, for example. Frank is no slouch. He came to this country as an adult and runs a successful mortgage company that he built from scratch. He earned an engineering degree from his birth country and speaks several languages. So it was surprising when he asked why he needed a lawyer to lease out his surplus office space instead of just using a form from the office supply store and filling in the blanks.

The reality is that standardized forms don’t cover all the possible scenarios and liabilities that can arise in a lease arrangement. And if something goes wrong, the end result may be far more costly than a couple upfront hours of legal fees.

Here are some of the ways that a do-it-yourself lease can come back to haunt an owner.

Is It the Right Form?

Not every lease form is the same. Josie, an experienced property owner, liked to charge her tenants a share of the operating and maintenance expenses for the office building and grounds. That worked fine at some of her properties. Unfortunately, when she bought one particular office complex, she copied her lease from the previous owner’s form. That form required the tenant to pay a share of the cost of operating and maintaining the common areas, but not the rest of property. One of her tenants subsequently sued her over the excess payments.

Is It Filled Out Properly?

Even with the right form, things change from deal to deal. Your lease needs to change with them. The most routine information can have a tremendous impact.

Suppose an owner is leasing 1,000 square feet for 36 months at $12 per square foot per year. He can describe the rent as $12 per square foot per year, or as $36,000 for the term, or as $1,000 per month, or as $12,000 per year. That decision can have tremendous legal impact. (The right choice depends on whether size of the space is known or will be determined after construction, what options the landlord wants if the tenant fails to move out at the end of the term and possibly other factors.) Can you see why saying “$12,000 per year or $12 per square foot per year” is asking for a lawsuit?

My Broker Can Help

Brokers perform a valuable service by bringing the landlord and tenant together. Brokers are the experts on what space is available, prevailing market rates and location. But they are not licensed to practice law, and they often do not realize the legal subtleties of what they read or write. The minute a broker recommends a given form or tries to explain the legal effect of a lease provision, that broker is practicing law without a license.

Why take legal advice from someone who does not realize he or she is breaking the law by giving it? Better brokers will tell you that free legal advice is worth what you paid for it. Sometimes it is worth even less.

The Name Game

Another experienced landlord prepared a lease in the name of one of his other corporations instead of the corporation that owned the shopping center. Some time later, the tenant handed back the keys and stopped paying rent. The landlord tried to enforce the lease. The court noticed the discrepancy in ownership. Instead of breaching a 10-year lease, the tenant breached only a lease from month-to-month, or, at most, from year-to-year, and the landlord was able to recover only a fraction of the expected damages.

The same problem can come up if a lease lists the lessee’s name incorrectly or doesn’t use the complete legal name. Property owners don’t always know how to verify that information, or to make sure that the tenant has taken all the necessary steps for its corporation or limited liability company to authorize and sign the lease.

Who Is Responsible?

Most tenants are corporations or limited liability companies. In rare cases, the tenant’s stockholders or members can be held personally responsible if the tenant stops paying rent. A lawyer can suggest when a guaranty is needed and can prepare the guaranty to give the property owner maximum protection. A lawyer can also make sure the lease limits a landlord’s liability so as not to endanger his or her other properties or assets.

These are just a few of the issues that can come up in even the most routine office lease. An experienced leasing lawyer can make sure that a lease gives the client the maximum protection. But your lawyer can’t help you unless you ask. Once you and your tenant have signed a do-it-yourself lease, the best opportunity for your lawyer to help has passed.

Jack Levey practices commercial real estate and business law with the Columbus office of Plunkett Cooney and is co-author of a reference work on Ohio real estate law. He can be reached at (614) 629-3002 or jlevey@plunkettcooney.com.